Advancing a Free Society

Overselling of Microfinance

Monday, January 24, 2011

Some enthusiasts for microfinance have sold it as an important component of the solution to poverty in developing countries. It often does help lower poverty, especially of poor women, but it cannot ever make more than a small contribution to overcoming poverty. As I said on October 29th 2006 when we posted on microfinance, “Economic growth requires secure property rights, encouragement of private enterprise, openness to international trade, stimulation of education, limited and sensible regulations, and reasonably honest government. Microfinance makes only a small direct contribution to any of those variables”. Others may subtract some of the variables I mention, and add different ones, but no serious development economist would suggest that microfinance would have a major role in the economic development of poor economies.

Nor did microfinance invent small-scale loans to poor farmers and others. Local moneylenders in India and elsewhere have been doing that for centuries. However, the Grameen Bank founded in 1983 by Muhammad Yunus discovered several rather new ways to lend to the poor. This bank loaned primarily to poor women, usually Moslem women. Local moneylenders generally ignored Moslem women, either out of prejudice against women managing their own (small) businesses, or for other reasons.

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